How are hedge funds positioning themselves to capitalise on the potential growth opportunities in the Asia-Pacific region?

Bloomberg News Online reported on November 27, 2013 that global hedge funds, including the likes of Soros Fund Management, LLC, have been converging into the Asia-Pacific region in search of greater returns, and increase their assets under management (AUM) base. According to a Nov. 27 Bloomberg News report, global investment banks such as Goldman Sachs Group Inc. (GS), UBS AG. (UBS), and GLG Partners, Inc. (GLG) have reportedly kickstarted their capital-raising activities in the Asia-Pacific region in a bid to capitalise on the potential growth opportunities available in this region. Separately, in a November 26, 2013 Bloomberg News Online article, it reported that one of the Asian-run arms belonging to Soros Fund Management, LLC, has been making short positions on the Japanese Yen (JPY) currency, and taking up long positions in some Japanese corporations, as there are anticipations like Mr. George. Soros, who is among the famously touted global hedge fund managers, and other hedge fund managers are waiting to see if ‘Abenomics’ is the potential remedy in reviving the decades-old deflationary conditions in Japan, and the relative underperformance among several Japanese equities.

The entry of large hedge fund players have also resulted in the creation of a more competitive environment as shown by the impact of several smaller players who are struggling to stem the tide of redemptions coming off from high net-worth investors (HNI), pension funds, endowments, among others. The increasingly competitive environment coming from the large hedge fund firms in the Asia-Pacific region has proven to be too overwhelming for smaller funds trying to gain a firm foothold due to the various benefits investors could otherwise seek while putting their capital in large scale in-house funds, which are commonly seen to be as less expensive to manage, and have potential alpha growth opportunities associated with these respective funds, if one were to stick with these large fund managers who might have greater clout, and reach among various investment offerings, and other institutional investors’ capital.

The shifts towards large hedge funds are also attributed to rising costs of compliance, and serving the needs of institutional investors, which have put a damper on potential growth opportunities available to smaller-run firms. In addition, fund of funds (FOFs) firms have also been struggling in the Asia-Pacific region as a result of the fallout of the 2008-2009 Global Financial Crisis (GFC). According to the Nov. 27 Bloomberg report, Mr. Richard Johnstone, Asia head of Albourne Partners Ltd. commented that several hedge fund startups that were managed by ex-bankers/traders following the 2008 crisis, have been struggling to keep up with the rising costs of compliance, and catering to institutional investors, which can easily topped the AUM of these firms, thus making it unprofitable to run the fund on a continuing basis.

The Nov. 27 Bloomberg News report also cited the minimum cap levels of 10.0 percent of a single fund’s AUM, which inhibited much of the expansion and growth plans in the Asia-Pacific region, especially for these small firms, as several of them are struggling to manage the huge cost burdens associated with running with a small investor base. In a March 2013 survey on global investors conducted by one of Switzerland’s top investment banks, Credit Suisse Group, AG (CS), Bloomberg News cited among the findings from the report that highlighted several results including the approximately 66.0 percent of these global investors segment indicated that they are prohibited from investing in funds with less than USD 50.0 million in AUM, and can only be able to do so under exceptional cases. These limitations, along with several others, including the low performance rates exhibited by many smaller hedge funds in the Asia-Pacific region have resulted in several fund closures. Bloomberg News also reported that Albourne Partners, through a tracking analysis of 23 Asian hedge fund startups in 2009 and 2010, and run by many former employees of large investment banks, are now finding themselves struggling to cope with the cost burdens associated with managing their respective hedge fund operations. In a separate survey conducted by one of the leading industry data providers, Eurekahedge Pte. Ltd. in Singapore, it was reported that the 2006 crop of Asian hedge fund startups on average raised approximately USD 25.0 million, but have since been shrinking in size to a region of between USD 8.0 to USD 9.0 million since the 2009 major peaks, as a result of the competitive pressures faced by many of these smaller hedge fund startups.

The recent trends we’ve seen so far within the hedge fund industry in the Asia-Pacific region have shown the various shifts in investing attitudes among several high net worth investors, family offices, pension funds, and endowments towards larger size firms with greater AUM growth potential. The competitive landscape among several Asia-Pacific region based hedge fund firms has proved to be too overwhelming for most of the smaller hedge fund startups to cope with the rising compliance and regulatory costs associated with running the operations. The advantages of size, and reach have resulted in large scale hedge fund firms who are trying to gain traction and foothold in the Asia-Pacific region outperformed relative to their smaller peers, and could likely to be a trend among investor preferences as they seek to minimise their costs associated with monitoring, compliance, and various fund due diligence activities.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc